Gaggle Internet, Inc. is evaluating its cost of capital under alternative financing arrangements. In consultation with investment bankers, Gaggle expects to be able to issue new debt at par with a coupon rate of 8% and to issue new preferred stock with a $2.50 per share dividend at $25 a share. The common stock of Gaggle is currently selling for $20.00 a share. Gaggle expects to pay a dividend of $1.50 per share next year. Market analysts foresee a growth in dividends in Invest stock at a rate of 5% per year. Gaggle' marginal tax rate is 35%. rd *= 0.08 (1 – 0.35) = 0.52 or 5.2% rp = $2.50 / $25 = 10% re = $1.50 / $20 + 5% = 7.5% + 5% = 12.5% a. If Gaggle raises capital using 45% debt, 5% preferred stock, and 50% common stock, what is Gaggle's cost of capital? WACC = [0.45 (0.052)] + [0.05 ( 0.10)] + [0.50 (0.125)] WACC = 0.0234 + 0.005 + 0.0625 = 0.0909 = 9.09% b. If Gaggle raises capital using 30% debt, 5% preferred stock, and 65% common stock, what is Gaggle’s cost of capital? WACC = [0.30 (0.052)] + [0.05 ( 0.10)] + [0.65 (0.125)] WACC = 0.0156 + 0.005 + 0.08125 = 0.10185 = 10.185%